Tuesday, April 22, 2014

Tuesday, February 1, 2011The California Court of Appeal, Second District, recently held that aborrower stated claims for promissory estoppel and fraud, in connectionwith alleged loan modification representations. However, the Courtrejected the borrower's efforts to void the related foreclosure sale.

The plaintiff borrower filed for bankruptcy, first as a Chapter 7 but thensought to convert to a Chapter 13. She contacted the defendant bank,which allegedly promised to work with her on a loan reinstatement andmodification if she would forgo further bankruptcy proceedings. Inreliance on that alleged promise, the borrower claimed she did not converther bankruptcy case to a chapter 13 proceeding or oppose the bank's motionto lift the bankruptcy stay. While the bank was promising to work withborrower, the bank allegedly was simultaneously complying with the noticerequirements to conduct a sale under the power of sale in the deed oftrust.

The bankruptcy court lifted the stay. But the bank allegedly did not workwith borrower in an attempt to reinstate and modify the loan. Rather, itcompleted the foreclosure.

The borrower filed this action against the bank, asserting a cause ofaction for promissory estoppel and fraud, among others. She argued thebank's promise to work with her in reinstating and modifying the loan wasenforceable, she had relied on the promise by forgoing bankruptcyprotection under Chapter 13, and the bank subsequently breached itspromise by foreclosing. The trial court dismissed the case on demurrer.

The California appellate court reversed in part, holding: (1) theborrower could have reasonably relied on the bank's promise to work on aloan reinstatement and modification if she did not seek relief underchapter 13; (2) the promise was sufficiently concrete to be enforceable;and (3) the borrower's decision to forgo Chapter 13 relief wasdetrimental because it allowed the bank to foreclose on the property. TheCourt therefore allowed the promissory estoppel and fraud claims tosurvive.

However, the appellate court also held that the borrower's complaint didnot allege any irregularities in the foreclosure process that would permitthe trial court to void the deed of sale or otherwise invalidate theforeclosure.

The bank argued that an oral promise to postpone either a loan payment ora foreclosure is unenforceable. However, the Court noted that "thedoctrine of promissory estoppel is used to provide a substitute for theconsideration which ordinarily is required to create an enforceablepromise." The Court further noted that a promissory estoppel claimgenerally entitles a borrower to the damages available on a breach ofcontract claim.

However, the Court also held that, "[b]ecause this is not a case where thehomeowner paid the funds needed to reinstate the loan before theforeclosure, promissory estoppel does not provide a basis for voiding thedeed of sale or otherwise invalidating the foreclosure."

The Court also rejected the borrower's allegations that: (1) the trusteeunder the deed of trust was defective because the "Substitution ofTrustee" was signed by the bank's attorney-in-fact; and (2) theforeclosure sale was void because the notice of default mistakenly thewrong beneficiary.

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